seven signs of ethical collapse
DESCRIPTION
TRANSCRIPT
![Page 1: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/1.jpg)
The Seven Signs of Ethical Collapse: How To Spot Moral Meltdowns in Companies . . . Before It’s Too Late
A Focus on Ethical CultureProfessor Marianne M. JenningsW.P. Carey School of Business
![Page 2: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/2.jpg)
Companies That Fell; Round 2 for some• Adelphia• Boeing• Cendant• Computer Associates• Tyco International• General Electric• Global Crossing• Merrill Lynch• Enron• Qwest• WorldCom• Royal Shell• Nortel• Krispy Kreme• Refco• Hewlett-Packard• UnitedHealth Group
• AT&T• Xerox• Kmart• Citigroup• Lucent• ImClone• Arthur Andersen• HealthSouth• Royal Ahold• Parmalat• Apollo Group• Marsh & McLennan• AIG (Putnam)(Mercer)• Fannie Mae• KPMG• GM• The stock options (130
companies)
![Page 3: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/3.jpg)
3
Some sample fines . . .• Boeing
• $615 million fine• Royal Shell
• $120 million fine• AIG
• $1.5 billion for accounting misstatements• HealthSouth
• $1 billion restatement• $100 million fine
• Tenet• $725 million settlement• Plus interest, for total of $900 million
• HCA• $1.7 billion in civil and criminal fines
• UnitedHealth Group• Parmalat
![Page 4: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/4.jpg)
4
I. What can we learn?
![Page 5: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/5.jpg)
a. These were not close calls.
• Capitalizing ordinary expenses• Backdating options• Embezzlement• Insider trading• Fraud• Spying
![Page 6: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/6.jpg)
b. We’ve been down this road before."Where were these professionals ... when
these clearly improper transactions were being consummated? Why didn't any of them speak up or disassociate themselves from the transactions?"
Judge Stanley SporkinLincoln Sav. & Loan Ass'n v. Wall, 743 F. Supp. 901, at 920
(D.C.Cir.1990).
![Page 7: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/7.jpg)
So, what makes good people at great companies do really dumb and unethical things?
Knowing business history and that these were not close calls, how do these ethical, legal, and, too often, financial collapses
occur?
![Page 8: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/8.jpg)
II. Thoughts on common threads among the collapsed companies and antidotes for prevention
![Page 9: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/9.jpg)
![Page 10: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/10.jpg)
Common Traits in Ethical Collapse
1. Pressure to maintain numbers 2. Fear and silence 3. Young ‘uns and a Bigger-Than-Life-CEO 4. Weak board 5. Conflicts 6. Innovation like no other company7. Goodness in some areas atones for evil in others
![Page 11: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/11.jpg)
1. Pressure to Maintain Numbers
• High ROE; double-digit growth, etc.• Pledges to continue the performance
![Page 12: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/12.jpg)
Pressure Antidotes
• Antidote: Help employees distinguish between superior skill, foresight and industry and cheating.
• Antidote: Watch unconsciously sent signals.• “Find a way.”• “Whatever it takes.”• “Sharpen your pencil.”
![Page 13: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/13.jpg)
2. Fear and Silence
• There is never a problem with employees missing the ethical issues
• Always a problem of not raising the issue, being ignored, not having an avenue for raising the issue, or being fired for raising the issue
![Page 14: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/14.jpg)
Ethics at Work
KPMG 2000 Survey
• 76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months
• 49% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”
KPMG 2005 Survey• 74% of employees observed a
high level of illegal or unethical conduct at work in the past 12 months
• 50% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”
![Page 15: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/15.jpg)
State of Ethics• 65% DIDN’T REPORT (1999)• 37% DIDN’T REPORT (2003)• 41%-50% DIDN’T REPORT (2006)
![Page 16: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/16.jpg)
Why didn’t they report?• 96% feared being accused of not being a team player
(same 1999, 2003)• 81% feared corrective action would not be taken (2005
data leaning toward this as #1)• 68% feared retribution from their supervisors• 57% feel pressure to do “whatever it takes” to meet
business targets• 49% believe they are rewarded for results, not the
means by which they achieve them (SHRM and industry surveys)
![Page 17: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/17.jpg)
Merck• “I just can’t wait to be the one to present those results to
senior management.”Dr. Alise ReicinIn a 1997 e-mail on “C.V. events” (cardiovascular effects of Vioxx)Merck had not yet begun selling Vioxx
• “Obstacles” – reference for negative CV events data on Vioxx; used in videotaped sales training for Merck sales reps
• “Dodgeball” – term used to describe what sales reps should do when asked questions about CV events and medical data
![Page 18: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/18.jpg)
Fear and Silence Antidotes
• Anonymous reporting• Response and follow-up• Review by board• Disciplinary actions• Reward system (guidelines now have both
carrot and stick requirements)
![Page 19: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/19.jpg)
19
Remember two critical elements:1. Tone at the top and the importance of
example2. Enforcement: Must be absolute,
unequivocal, egalitarian
![Page 20: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/20.jpg)
20
Enforcement is Absolute, Unequivocal, and Egalitarian• “If the janitor had taken the liquor, he
would have been fired.”Student’s observation on discussion of tolerance for a
manager who “borrowed” three bottles of vodka on a Friday night for her birthday party after work and brought in replacements on Monday morning
![Page 21: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/21.jpg)
3. Young ‘Uns and Bigger-than-Life CEO• CEO a full generation older than direct
reports and/or lack of depth in direct reports• MBAs (senior management)• “I hire them just like me: smart, poor and
wants to be rich.”Dennis KozlowskiFormer CEO, Tyco
![Page 22: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/22.jpg)
22
A Look At Your Future Work Force• 60% of high school students cheated on an exam in the last
year • 62% of high school students lied to a teacher in the past year• 82% of high school students lied to their parents in the past
year• 33% copied something from the Internet• 28% stole from a store in the past year• 23% stole from a parent or relative
Josephson Institute 2006
![Page 23: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/23.jpg)
Iconic CEO and Young ‘unsAntidotes• Always question the icon• Help the young ‘uns: ethics requires daily
effort, reinforcement, and training• Without it, you slip – Everyone believes
they are ethical!• Introspection is the key
![Page 24: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/24.jpg)
24
High Ethical Self-Esteem
Living in Denial and Slipping Into Complacency
![Page 25: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/25.jpg)
Guess who said it?
"Ethical standards and practices in the workplace are the pillars of successful employment and ultimately the benchmark for a strong business."
![Page 26: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/26.jpg)
Guess who said it!
“it is the responsibility of management to operate the company in a competent and ethical manner. Senior management is expected to know how the company earns its income and what risks the company is undertaking in the course of carrying out its business. Management should never put personal interests ahead of or in conflict with the interests of the company.”
![Page 27: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/27.jpg)
Guess who said it!
“We understand why the American people are stunned and outraged by the failure of corporate leadership and governance at Enron. It is wholly irresponsible and unacceptable for corporate leaders to say they did not know – or suggest it was not their duty to know – about the operations and activities of their company, particularly when it comes to risks that threaten the fundamental viability of their company.”
![Page 28: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/28.jpg)
28
The Survey on Lying• 52% said lying was never justified• 66% said lying could be justified• 65% would lie to save someone’s feelings• 40% said they’d never lied or cheated• 10% of the 40% said they had told a lie in the past week• 40% said it is “okay” to exaggerate a story “to make it
more interesting”• 33% said it is “okay” to lie about your age (only to make
yourself younger, though, not for purposes of drinking age)• 33% said it is “okay” to lie about being sick to take a day
offAP Poll, June 23-27, 2006
![Page 29: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/29.jpg)
29
More on the survey
• 77 Virginia college students monitored themselves for one week; only 1 reported telling no lies
• 70 people in Charlottesville, VA did the same; 6 reported telling no lies
• Most likely to lie: 18-29College graduatesHigher incomes
![Page 30: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/30.jpg)
30
Statistics from the Voluntary Payment System for BagelsPercentage of time people pay for the bagels?
![Page 31: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/31.jpg)
31
Greatest decline in payment rate?
![Page 32: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/32.jpg)
32
After 1992
![Page 33: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/33.jpg)
33
Greatest increase in payment rate?
![Page 34: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/34.jpg)
34
After September 11, 2001
![Page 35: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/35.jpg)
35
Which companies had the highest failure-to-pay rate?• Telecoms• Companies where security clearance is high• Mining and manufacturing
![Page 36: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/36.jpg)
36
Which group had the highest failure-to-pay rate?• Front-line employees• Executives• Sales
![Page 37: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/37.jpg)
37
What do Finova, Nortel, Microstrategy, Computer Associates, and Fannie Mae all have in common?
![Page 38: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/38.jpg)
38
Accounting Improprieties and Massive Restatements
Also ranked in Fortune’s Top 100 Companies to Work For – Some for
three years running
![Page 39: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/39.jpg)
4. Weak Boards • Experience• Age• Conflicts
• A. Consulting• B. Related parties transactions/interests• C. Philanthropy• D. Complexity of relationships
![Page 40: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/40.jpg)
40
Quotes That Haunt!“Most of us made it to the chief executive position because of a particularly high degree responsibility . . . We are offended most by the perception that we would waste the resources of a company that is a major part of our life and livelihood, and that we would be happy with directors who would permit waste. . . So as a CEO I want a strong, competent board.”
![Page 41: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/41.jpg)
41
Dennis Kozlowski
– While CEO of Tyco and donating millions of Tyco money to charities, including his wife’s trainer and his decorator
![Page 42: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/42.jpg)
42
Quotes That Haunt!
“Boards should be absolutely certain that the company is run properly from a fiduciary standpoint in every degree. I am a great believer in the audit committee having full access to the auditors in every way, shape, or form.” Fortune , Nov. 18, 2002, p. 34.
![Page 43: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/43.jpg)
43
Al Dunlap
while CEO of now bankrupt Sunbeam
![Page 44: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/44.jpg)
Weak Board Antidotes• Dig deep on conflicts• Don’t fall for governance myths:
• Stock ownership• 10-year limits• Mandatory retirement• Nomination by shareholders
• Challenge officers, but don’t micromanage• Pay attention to perks• Know industry accounting issues• MBWA
![Page 45: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/45.jpg)
5. Culture of ConflictsACTIVITY PERCENTAGE
OFCOMPANIES
Purchases or sales of insiders’ products or services 47%Loans to executives 39%Directors who sell legal or banking services to company 35%Buying, selling, lending to or investing in companiesinsiders own 21%Hiring relatives 14%Director consulting arrangements 11%Leasing, selling or buying airplanes to or from insiders 10%Company borrowing from insider or insider’s company 6%SEC Report 2003
![Page 46: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/46.jpg)
46
United HealthGroup Conflicts
• Head of compensation committee managed CEO’s family trust
• Members of compensation committee had their foundations receive donations from CEOs
• Served on each others’ foundation boards
![Page 47: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/47.jpg)
Conflicts Culture Antidotes
• Believe in conflicts of interest!• Remember the two ways to manage a
conflict:• Don’t• Disclose
• Establish definitive rules and follow them.
![Page 48: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/48.jpg)
6. Innovation like no other
![Page 49: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/49.jpg)
Guess who said it!
“. . . standard accounting rules [are] not the best way to measure [CA’s] results because it had changed to a new business model offering its clients more flexibility.”
![Page 50: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/50.jpg)
Sanjay Kumar, former CEO, Computer Associates; entered guilty plea to fraud
![Page 51: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/51.jpg)
A Few Quiz Questions
What company was described in 2001 as having a delivery and marketing model that would change its industry?
![Page 52: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/52.jpg)
HealthSouth
Just emerging from bankruptcy
![Page 53: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/53.jpg)
A belief that mundane rules don’t apply to them!• Dot-com mantra of EBITDA, “You know, if
we hadn’t had all those expenses, we would have had earnings!”
![Page 54: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/54.jpg)
7. Goodness in some areas atones for evil in others• Culture of philanthropy• Culture of diversity• Culture of safety• Culture of environmentally conscious
operations• Culture of volunteerism• “The Changing Lanes” Phenomenon of
Moral Schizophrenia
![Page 55: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/55.jpg)
Guess Who Said It!
“It’s more than just money. You’ve got to give back to the community that supported you.”
![Page 56: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/56.jpg)
John Rigas
while CEO of Adelphia, who gave back to his daughter and others in business with him
![Page 57: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/57.jpg)
Antidotes for the Good/Evil Balancing Act• Rethink popular notions of social
responsibility and business• Rethink company activities, perceptions,
realities• Be very skeptical about “doing well by
doing good”• Rely on virtue ethics and simplicity: Truth,
Honesty, Fairness, Egalitarianism
![Page 58: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/58.jpg)
III. Thoughts on Overarching Philosophy and Attitudes
![Page 59: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/59.jpg)
a. Watch the gradual slippage that comes from complacency.
![Page 60: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/60.jpg)
On Slipping . . . “You slip-slide into evil, he thought. You cross the
line for just one moment. You cross back. You feel safe. You change things, you believe, for the better. The line is still intact. Okay, maybe there’s a smudge there now, but you can still see it clearly. And the next time you cross, maybe that line smudges a little more. But you have your bearings. No matter what happens to that line, you remember where it is.Don’t you?”
Harlan Coben, Chapter 32
![Page 61: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/61.jpg)
b. “We don’t think they began as frauds.”• The problem of “A Simple Plan”• “Time-out” Antidote• “It’s a gray area.”
![Page 62: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/62.jpg)
Questions About the Gray Area?• Why is it important that it be gray to you?• Is it legally gray?• Is it ethically gray?• Is it a good-faith disagreement?• Interpretation vs. loophole vs. nondisclosure of
relevant information• Descriptors: “Aggressive opinion”
“Aggressive accounting”“Financial engineering”
![Page 63: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/63.jpg)
c. Ultimately, leadership and example matter.
Culture is to company what character is to individual.
Culture comes from the collective actions and responses of leaders.
Ultimately, culture depends on individuals’ character.
The Missed Reassurance of the HP Crisis.
![Page 64: Seven signs of ethical collapse](https://reader034.vdocuments.us/reader034/viewer/2022050711/5454ed40af79590b088b462a/html5/thumbnails/64.jpg)
Layers of Responsibility for EthicsWho is responsible?
IndividualAction
Company Regulations
Government and Systems Regulations